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CFTC Advisory Committee Says There Is No Evidence Justifying Proposed New Position Limits

A report issued by the Energy and Environmental Markets Advisory Committee of the Commodity Futures Trading Commission roundly criticized the CFTC’s 2013 proposed rule mandating new federal position limits for energy futures, options and swaps. According to the report, which was adopted by an 8-1 vote of the EEMAC’s members, (1) there is “no evidence” that the proposed rule is “demonstrably necessary to prevent excessive speculation or associated fluctuations in price”; (2) coupled with already “sharp reduction” of liquidity in energy derivatives because of world developments, passage of the proposed rule would adversely impact the ability of end users to use energy derivatives for hedging; and (3) proposed limitations on what constitutes bona fide hedging are "unnecessarily restrictive and contrary to standard, prudent risk management activities in energy markets.” Tyson Slocum, Energy Program Director of Public Citizen, Inc., the one EEMAC member voting against the report, wrote a dissent that criticized its findings, saying that “[t]he Report’s claim that Position Limits are not necessary relies on selective presentations while ignoring other academic research showing that position limits are necessary.” Based on the findings of the report, CFTC Commissioner J. Christopher Giancarlo said the CFTC “should not and need not finalize its current position limit proposal.” (Click here to access an overview of the CFTC’s latest proposed rules on position limits in the article, “CFTC Proposes New Position Limit Rules: Addresses Absolute Limits of 28 Core Futures Products, Aggregation, and Bona Fide Hedging” in the November 5, 2013 edition ofBetween Bridges.)

My View: According to a report this week in the Wall Street Journal (click here to access), CFTC Chairman Timothy Massad rejected the rationale of the EEMAC in recommending to scrap the CFTC’s latest proposed position limits rules –principally that they are not necessary or may hurt liquidity. The newspaper quoted Mr. Massad as saying, “[i]t strikes me a bit like saying you’re against speed limits because they may make you late for work.” However, this comment ignores the existing practice of designated contract markets to enforce strict position limits for energy and other commodity derivatives in the spot month, and maintain accountability levels in other months. Utilizing an accountability level regime permits DCMs to closely monitor overall market activity, but only restrict trading size when they believe it is necessary. In his dissenting view, Mr. Slocum questioned the objectivity of DCMs to establish or enforce position limits' alternatives as they are for-profit enterprises. However, past articles on Bridging the Week are replete with examples of DCMs enforcing their position limit requirements. (Click here to access links to past articles in Bridging the Week on position limits violations.) Moreover, the CFTC always retains its authority to take disciplinary action against a DCM that it believes it not fulfilling its core requirement to prevent market disruption.

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